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At a meeting in September 2007 of the executive committee of Bayer MaterialScience, Babe knew he was expected to present a detailed plan for reducing overhead costs at the company’s North American headquarters. Earlier that year the committee had suggested shutting down the headquarters altogether; to preserve the region’s credibility—and his own position—Babe would have to find some impressive savings. He did. The plan he presented would cut 25% from the $400 million in overhead costs. But Babe didn’t stop there: He asked for $70 million in additional resources, which he would use to completely transform and grow the business.

That bold proposal paid off. The committee endorsed his plan and granted the $70 million, giving Babe 18 months in which to deliver. Now he would have to lay off hundreds of employees; retrain 1,000 others; outsource many operations; roll out new IT systems; and modify the company’s product offerings. Following the mantra “Simplify, standardize, automate,” his transformation team redesigned virtually every one of the company’s business processes. Perhaps most important, it developed change-management skills within the organization.

The Idea: When Greg Babe, the CEO of Bayer MaterialScience North America, was blindsided by a global executive committee proposal that his headquarters be shut down, he turned the blow into an opportunity to completely reshape his company.

At a September 2007 meeting of the executive committee of Bayer MaterialScience, a division of the chemical and health care giant Bayer AG, the directors were expecting me to present a detailed plan for significantly reducing overhead costs at the North American headquarters of BMS, outside Pittsburgh. Instead I asked for $70 million in additional resources.

The last time I’d discussed the fate of the North American business with the global leadership was in early 2007, when the newly appointed CEO of BMS global asked me to participate in an executive committee meeting at our Baytown, Texas, facility. I had been CEO of BMS North America since mid-2004. But I hadn’t played a significant role in global governance, because Bayer’s strategic direction had always been set by leaders based in Germany. Still relatively new to my position, I assumed we’d be discussing what made the operation in North America—a region that generates roughly 25% of the company’s global revenues— unique, what challenges we faced, where we were considering investments, and how I planned to lead the regional business into the future. My top leadership team had prepared several presentations showing the added value of our region.

But at that Texas meeting the executive committee caught me by surprise with a dramatic proposal: that the Pittsburgh headquarters be dismantled and the company’s three business units divide HQ’s functional and R&D resources and relocate them to sites across the region and around the globe. The regional structure was bloated, the committee thought, and thus impeded Bayer’s overall efficiency and growth.

Since taking the CEO job, I had been talking with my top leadership team about how to streamline operations, but that meeting required me to think quickly. “If you are intent on closing Pittsburgh,” I said, “so be it. But if you are really interested in making Bayer MaterialScience more competitive in North America, I think we can do that.”

I asked for time to develop some proposals for tackling the bloated overhead. Looking at a problem from a regional rather than a global point of view was unusual under Bayer’s governance structure, but the committee agreed to give me a shot. The stakes couldn’t have been higher: Not only the future of my position but the credibility of the entire regional operation was in question.

Short-Term Pain, No Long-Term Gain

Shutting down the North American headquarters sounded extreme to me, but I knew the executive committee had identified some very real problems with our business. Our performance tends to ride the waves of the chemical and polymers industry, which match those of the global economy. Our products are used in the automobile and construction industries, which are particularly vulnerable to global downturns.

Although BMS North America had performed relatively well during my first few years as CEO, with steady growth in 2005 and a modest flattening in 2006, I knew we’d suffered during the lags that are typical in the chemical business. And for years the division had been allowed to navigate those rough patches with what I’ll call knee-jerk cost cutting. The costs it did cut weren’t well thought through, so the underlying business processes remained unchanged. Typically, overhead would be hastily cut by 10% and a round of layoffs would be made—quick fixes to improve the bottom line. But whenever our industry started to rebound, those costs would quietly creep back in. It was a cycle our employees had come to expect. Voluntary turnover was extremely low—probably too low. Our employees waited out the cycles, and the pattern never changed: short-term pain with no long-term gain.

When I returned to Pennsylvania after the Baytown meeting, I quickly put together a war room team. It had to be small, because we were on a very short timetable, and it had to work in secret so as not to sound internal alarm bells. The team had to have the right mix of skills and an ability to think outside the box. I selected just four key people: a special-projects executive with a good external view from previous experience as a consultant, a top controller, someone with a strong marketing background, and someone with organizational-change experience. I asked them to make it their full-time mission to pull together a picture of our costs that was clear enough to enable a truly transformative cost cutting plan.

The team constructed what we called a cost cube: expense data that could be organized and segmented along many different dimensions. We knew that we needed to fundamentally change how we did business and significantly reduce SG&A (selling, general, and administrative) costs, and we made those our priorities. But a month into the analysis, we had our “aha” moment. The cost structure should be determined by how we chose to grow our business, not by an arbitrary cost-reduction target. All good business leaders know this, but it is often lost in the myopic search for savings. That’s especially true if restructuring is done under duress.

From that moment on, we made profitable growth our goal. All our strategies and actions were planned through a growth lens rather than a tactical cost-reduction lens. The shift in approach was profound; it affected systems and employee-training investments, the outsourcing of functions and services, and the structuring of contracts.

This wasn’t a cost-cutting exercise—it was a growth initiative. We would redesign everything to build in flexibility.

Everyone, including the global leadership, was expecting us to come back with cost-cutting proposals. But this wasn’t a cost-cutting exercise—it was a growth initiative. Instead of simply lopping off some of our overhead, we would redesign everything about our businesses to build in flexibility—not only to profitably survive a downturn but, more important, to scale for future growth.

Red Sky in the Morning…

I knew I needed to enlist the entire company in this project. The war room team had gotten us to a point of clarity about what we needed to do. How to go about it would require much broader thinking. In mid-May I gathered all the BMS vice presidents in the region for what I called my “sailors take warning” communication, referring to the old adage that a red sky in the morning often indicates bad weather on the horizon. It was unusual for me to convene all of them at once. I didn’t tell them why they were being assembled, but they knew the meeting was mandatory. The anxiety in the cafeteria—the only room big enough to hold all of us—was palpable.

I explained that we’d begun a cost-cutting initiative but had quickly realized that we needed a complete competitive overhaul. I said that although we were in a great situation businesswise, and the global economy appeared to be in fine shape, there were clues that not all was as rosy as it seemed; we faced unfavorable chemical import-export trends, natural gas price increases, and customer inventory shifts, among other issues. With a sense of what was coming, I said, we really should fix our roof while the sun was shining and not wait until the rain poured down.

We had very specific goals at that point: We wanted a strategy that would keep us growing at 1% to 2% above GDP in all our areas, but we also wanted to save 25% on our SG&A expenses. I said I needed the support of everyone in the room.

I was asking the vice presidents to understand and buy into the transformation that would be required in every aspect of our business. They had to begin thinking about how their specific areas could be changed to support the transformation—knowing that their own jobs might not survive the process. Of course there was pushback: “These kinds of changes are not sustainable.” “There’s no way you can make such dramatic changes and still be successful going forward.” “The business is running so well, you know we’ll drop the ball on this sooner or later.” Many of their concerns were legitimate, but none trumped the fact that this was a make-or-break moment for the company. All our measures of success would be altered. In the past, for example, we had focused on the number of patents filed per day. Now we would focus on the number of products in the pipeline that had clear commercial applications.

Three weeks later I rolled the same message out to all our employees, again saying that I needed their support but could not promise they’d still be with the company in a year and a half. Then we began to fine-tune our growth proposal. Dozens of employees moved to the program management office and began the serious work of redesigning how we did business. Other than the actual production of finished goods, no process was left untouched.

The Big Meeting

After months of planning and a full-scale dry run of my presentation with my top team, I flew to Germany for that September 2007 meeting. I had to convince the board that this was more than a typical cost cutting—this was truly a transformation aimed at growth. Yes, we would need to spend money, which seemed contradictory. But that money would help us grow the business while we significantly reduced costs in many areas. The $70 million I was asking for would cover onetime expenses related to layoffs, the development of key systems that we’d be using to outsource or automate particular functions, and training to retool our sales and marketing staff. It was as big a meeting as I’ve ever had.

My presentation was long by board standards—not a 20-minute PowerPoint. There was lots of discussion, lots of challenging, lots of in-depth questioning about the key concepts of our proposal, many of which ran counter to how the business was managed globally. For example, outsourcing transportation, traditionally deemed a core competency, would allow customers to give 12 rather than 72 hours’ notice for shipping. In essence, I promised that with a short-term investment of money I could turn BMS North America into a sustainably more profitable growth engine for the company.

That bold proposal paid off. I left the meeting with the $70 million and an endorsement for my plan. I was excited, but also scared to death, because delivering on it was by no means going to be easy. It would require laying off hundreds of employees and retraining more than 1,000 others, outsourcing many operations, rolling out new IT systems, and modifying our product offerings, all within 18 months—not much time for a project of that scale.

Before I even got to my flight home, I called my top team members to let them know that it was a go. My first task was to select leaders to oversee the four key areas of our transformation: growth, business support, supply chain, and culture. Instead of turning to established executives, I picked four people from our high-potential program who, I believed, could think creatively about change without worrying about upsetting the status quo. It would be a very high-profile, high-stress assignment for each of them, and a once-in-a-lifetime career opportunity as well.

The four chose a total of 100 others to work with them on the project, all of whom were then dedicated full-time to our transformation. I met with the leaders every Thursday, with a different key decision on the agenda each week. The clock was ticking, so we didn’t have the luxury of long, drawn-out decision making. My goal was to create a sense of urgency, following the management thinker John Kotter’s eight steps for leading change.

“Simplify, Standardize, Automate”

Over the next 18 months we weathered significant staff layoffs and redesigned virtually every one of our business processes following the mantra “Simplify, standardize, automate.” For example, we streamlined and eliminated defects in our order-to-cash process to create “no touch” orders. Today we receive more than 70% of our orders electronically, and more than 50% of them aren’t touched. This is better than efficient—it’s effective. To achieve it, our supply chains have to be flawless. And when we do touch orders, there are typically good reasons from the customer side. (We did not automate customer intimacy out of the equation!) We developed a variable transportation cost model through careful negotiations with two key vendors—which was crucial to controlling costs amid the ebbs and flows of our business. We killed several much-loved projects because it became clear that they had limited commercial potential; instead we opted for a rigorous stage-gate development process (our term for it was “ruthless decision making”) that would require clear evidence of solid commercial potential before projects could go forward. Virtually everything, with the exception of how frontline workers did their jobs on the factory floor, was changed in one fashion or another in that year and a half—our planning processes, how we drove our supply chain, the partners with whom we dealt, how we made sales forecasts, how we managed our sales leads and pipeline, and so on. But perhaps most important, we developed change-management skills within the organization. We didn’t rely on outside consultants to recommend the changes to us. We had to own these processes, and to redesign them in a way we knew could work.

As I look back on those months of rapidly refashioning our entire company, I am proudest of the employees who worked in good faith toward our goals without knowing whether they’d have jobs in the end. And despite that stress, we had no operational injuries. Our people demonstrated an enormous capacity to deliver in the face of uncertainty. By the time the global downturn had begun to pound the chemical industry worldwide, our efforts were so far advanced that our business was poised to rebound quickly. By March 2009 we had completed all the restructuring.

Though nearly everything ran according to plan, I wish I could have done one thing better. I had intended to use those 18 months to improve our talent management—to stretch and grow key employees, preparing them for future leadership roles, and to provide some of our top performers with new, permanent roles. But in our efforts to stay on target, that plan fell by the wayside. Of the four high potentials I had picked to lead our efforts, two left the company for terrific opportunities elsewhere. I consider it a signal of success that BMS is where they acquired the skills that led to those positions, and I hope they return to the company someday—but I wish we could have worked harder to find internal opportunities for them. We are working now to improve talent management in the transformed BMS, so I hope it’s a short-term problem.

Overall, the transformation went better than I had dared to hope. Looking back, I tip my hat to BMS CEO Patrick Thomas, who was willing to take a risk on us.

In early 2009 I flew back to Germany to tell the board that we had delivered on everything I’d promised: We had redesigned most of our business processes and system-enabled them. We’d made our warehousing, transportation, and international freight needs and costs variable by means of outsourcing. We’d reduced our total SG&A costs by 25% ($100 million) and our head count by nearly 30%. We’d developed new skills in the organization. Most important, we had enabled future growth in a highly efficient and highly effective organizational model.

In fact, we’d overdelivered: We spent only $60 million of the $70 million we were allotted.

We reduced SG&A costs by 25% and head count by nearly 30%. And we actually overdelivered on our promise: We spent only $60M of the $70M allotted for growth.

From closure conversations since then with the BMS leadership in Germany, I know that we’re seen to have done a good job with our transformation. It was difficult, personally, saying good-bye to dozens of long-term employees who left the organization. But navigating the complexities of the highly matrixed global organization while driving a fast-paced program with dozens of decisions each week was an exhilarating challenge.

Even more valuable, I think, is that many of our reinvented processes and the tools we developed, which were so foreign at the time to our whole business, have become commonplace at BMS around the world. No-touch orders are widespread, for example. “Simplify, standardize, automate” is a phrase everyone uses now. That speaks volumes about that thumbs-up moment in 2007.

Gregory S. Babe is the president and CEO of Bayer Corporation and Bayer MaterialScience LLC and the senior Bayer representative for North America.

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